Taking a Bite Out of Vet Bills.

As the pet insurance market matures, one insurer has taken a more measured approach to the product by adding a pet actuary.

Pet insurers are taking a page from the managed-care industry adding an actuary to analyze new ways to cover chronic ailments and betting that wellness coverage will lead to healthier pets and reduce claims costs in the long run.

Veterinary costs are growing as more pets receive sophisticated medical treatments--including hip replacements, cataract surgery and chemotherapy--which range in cost from $100 to $10,000. But that's only part of what's driving growth in pet insurance sales. People seem to be establishing closer bonds with their pets and are willing to stick with them through complicated and expensive medical treatments.

Jack Stephens is a veterinarian and president of Veterinary Pet Insurance. But until he was diagnosed with throat cancer, he didn't fully realize how meaningful pets could be to their owners. He credits the love, entertainment and exercise provided by his miniature pinscher, Spanky, as an important part of his recovery. "My cancer overwhelmingly demonstrated to me the value of companion pets," Stephens said in a commencement speech last spring at the University of Missouri Veterinary School. Stephens has seven dogs and two cats.

Only Two Providers

Stephens' company is one of two pet insurers that dominate the small but growing market. Each is backed by an insurance powerhouse.

Veterinary Pet Insurance, Anaheim, Calif., sells its products in California, and it markets nationally under the name DVM Insurance Agency through Scottsdale Insurance Co., Scottsdale, Ariz., an affiliate of Nationwide Mutual Insurance Co., Columbus, Ohio. To further cement its affiliation with Veterinary Pet Insurance, Scottsdale Insurance Co. purchased a $8.25 million stake in the insurer in September. Previously, it invested $4 million in the insurer.

Canton, Ohio-based Petshealth's program is underwritten by American Home Assurance Co., New York, an American International Group company.

Veterinary Pet Insurance--by far the market leader--has 115,000 policies in force, a 25% increase over 1998. The company generated $15.45 million in gross premium last year and is on target for $25 million in 1999, Stephens said. No. 2 Petshealth reports 9,500 policies in place, representing almost $1.8 million in written premium in 1999.

"When emergencies happen to pets, it's untimely. Pet owners have to come up with $100 to $500 instantly to pay the bill," said Petshealth President Russell Smith. "They want a vehicle in place to cover the expense."

The pet insurance market's potential is sizable. Nearly 60% of U.S. households, or 58.2 million, own a cat or a dog. Americans spend $20 billion annually on their pets, and more than 90% of pet owners take their cats and dogs to veterinarians for preventive care, according to the American Animal Hospital Association.

But the pet-insurance market is largely untapped--only 1% of the nation's estimated 120 million dogs and cats are covered by medical insurance, according to Petshealth. By comparison, more than 19% of pet owners in the United Kingdom carry pet insurance, and 48% of pets in Sweden are covered. Only cats and dogs can be insured in the United States, but Smith sees a strong possibility that coverage will be expanded to cover the family horse and pet rabbits, such as in the United Kingdom.

"But that's several years down the road," he said.

To more accurately determine the risks associated with this new line of business, Veterinary Pet Insurance has developed a pet actuary to analyze its database of more than 1 million accident or illness claims processed over the past 18 years.

Phil Panther is an actuarial assistant at National Casualty Co., a subsidiary of Nationwide Insurance Enterprise. The 33-year-old Panther was working in Scottsdale's personallines area when he was asked to work with the pet insurance line of business.

While Panther relies on Veterinary Pet Insurance to "fill in the gaps" in what he knows about the insuring of cats and dogs, his strength is to "put some meaning to the vast amounts of data--to step back and look at the big picture," he said.

When National Casualty wanted to get a better understanding of its exposures, Panther began developing database structures that looked beyond the basic loss-ratio statistics, which report the percentage of each premium dollar paid out in losses.

Panther determines the cost benefits of various tests, vaccinations and routine health maintenance procedures provided under the insurance policies and what impact they have on the frequency and severity of related ailments.

Currently, he's looking into hereditary and congenital endorsements--such as covering hip dysplasia in boxers. "Our goal is to make coverage as comprehensive as possible." Panther said.

What's Covered

Petshealth's all-inclusive coverage includes wellness checkups and medical expenses related to accidents and illnesses. "We cover it if it's not present at birth, such as back problems with dachshunds," Petshealth's Smith said. petshealth markets three plans for cats and dogs. The basic plan includes accident, illness and neutering expenses. The second and third levels differ in policy limits and include vaccinations, flea treatments and teeth cleaning. The plans have a $100 deductible and 80% reimbursement.

Veterinary Pet Insurance has changed the coverage it offers over the past two years. After test-marketing vaccination and other wellness coverage, "we found a way to economically to get it to work," Stephens said. Veterinary Pet Insurance offers it as a loss leader, he said. The premium for vaccination and routine care coverage is $99 annually.

"The loss ratio is high because when people buy routine care they use it. We're studying it to see if it created healthier pets and will save us money," he said.

Veterinary Pet Insurance bases its rates on the age of a pet, charging less for younger cats and dogs. The company's advantage plan has a $112,000 annual policy limit.

Getting the Word Out

Marketing and claims control are the primary challenges facing the pet insurance industry. Because pet insurance is relatively new in the United States, "we have to make the public aware of it," said Douglas Story, a vice president in AIG's program department, the underwriter for Petshealth policies.

Pet health insurers are using a variety of ways to reach pet owners. Petshealth uses work-site marketing and advertises on coupons distributed through 4,000 to 7,000 grocery stores nationwide. "When a pet owner purchases pet food, a coupon is generated at the cash register that advertises our product," Smith said.

Point-of-purchase displays at veterinarians' offices are the No. 1 marketing channel for Veterinary Pet Insurance. Public relations, policyholder referrals, advertising and the Internet follow close behind.

Stephens said Veterinary Pet Insurance plans to double its advertising budget this year to more than $4 million.

Monitoring Claims

Pet insurance, because of its battle for acceptance and what it insures, must be priced carefully Stephens said it's a continuing challenge to charge "around $200 premium and have to use that to service and pay claims with that money" Therefore, keeping costs down is important, Stephens said. The insurer's staff veterinarians keep an eye out for claims that seek coverage for pre-existing conditions, for example.

"We have to control losses," Stephens said. "That has been the demise of other companies."